4 Ways to Cash In on Energy Growth in China

by Aaron Levitt | November 20, 2013 10:53 am

[1]With the United States drastically reducing the amount of oil it imports thanks to fracking[2], China has emerged as the world’s top oil importer. According to the Energy Information Administration, the Asian Dragon’s net imports of crude oil were nearly 6.30 million barrels per day back in September. That compares to U.S. net imports of 6.24 million.

The EIA predicts that the import spread will widen even further as China continues to grow at its torrid pace.

Given the hefty increases in demand, China is pulling out all the stops in order to get oil into the hands of its people. That means supplying firepower to increase production at the various energy companies within its borders. From shale oil acreage binges to strategic deepwater partnerships with foreign producers, China’s energy giants are quickly becoming major worldwide players in the sector.

And with the emerging market leader’s energy demand not expected to decrease anytime soon, investors could be big winners in China’s energy machine. Here are four of the best ways to cash in.

PetroChina

[3]Everybody assumes that Warren Buffett’s newfound energy favorite Exxon (XOM[4]) is the world’s biggest oil firm based on production. The truth is that China’s state-owned PetroChina (PTR[5]) is beating the former Standard Oil piece by a pretty big margin on the production front. Overall, PTR saw a 4.3% rise in its oil and gas output during the first three quarters of the year to reach 1.04 billion barrels of oil equivalent.

However, PetroChina isn’t just resting on its laurels.

The integrated energy producer continues to make major moves to improve production. That includes adding Canadian shale assets and deepwater wells off the coast of Africa and in the Gulf of Mexico, as well as oil fields in the Middle East.

The latest blockbuster deal for PTR involves buying Brazilian oil giant Petrobras’ (PBR[6]) Peruvian assets for $2.6 billion. That will add roughly 800,000 metric tons worth of oil production to PetroChina’s output once the deal closes. It also gives the Chinese firm access to a pre-operational natural gas and condensate field as well as plenty of unexplored acreage.

Despite PetroChina’s production potential, shares of the firm currently trade for peanuts, with a forward P/E of just 9.79.

CNOOC

[7]China National Offshore Oil Corporation or CNOOC (CEO[8]) is China’s largest offshore energy producer and has a virtual vise-grip on fields off of China’s coast. Although, lately the company has spent more time focusing its efforts in Canadian onshore projects to fuel China’s oil addiction.

That includes this year’s huge $15.1 billion purchase of Canadian oil sands producer Nexen. That buyout was a great deal for CNOOC as oil production rose 17.8% in the third quarter — mostly due to the contribution of Nexen’s assets[9]. That’s great news for CEO, as the company has struggled in recent years to boost its own production.

But rising crude oil production isn’t the only reason the deal will be a winner.

CNOOC recently won a big and exclusive agreement with the government of British Columbia to move forward on a new liquefied natural gas export facility off the coast of Canada. Nexen owned 60% of the proposed venture and fields that will feed the plant.

As CNOOC is quickly becoming more of a diversified energy play, investors could be handsomely rewarded. CEO shares trade for a forward P/E of just 8.

China Petroleum & Chemical

[10]Shale gas has completely changed the picture for North America, and China Petroleum & Chemical Corp or Sinopec (SNP[11]) hopes it can the same in the emerging market nation.

China features some of the largest shale gas reserves on the planet, but has suffered from the high costs and technological know-how required to get it out of the ground. Some analysts have speculated that’s why China has actually been buying up shale fields in Canada — to get at the technology.

Regardless, Sinopec may have finally cracked the code.

SNP has finally begun production shale gas from 30 test wells in commercial quantities — about 1.06 million cubic meters of gas per day — in China’s Fuling shale field. That success in drilling has prompted Sinopec to more than doubled its 2015 output targets for the key shale formation. Additionally, SNP has partnered with Royal Dutch Shell (RDS.A[12]) to begin prospecting other shale fields for production.

While waiting for these shale efforts to pay off, investors in Sinopec gain access to one of china’s largest overall energy producers and the nation’s largest refining of crude oil. And unlike many other integrated oil firms[13] this quarter, SNP’s earnings were actually helped by that downstream position.

SNP trades for a dirt-cheap forward P/E of 7.6.

Global X China Energy ETF

[14]While the trio of PetroChina, CNOOC and Sinopec are becoming household names and are some of the largest energy firms on the planet — meaning they are fully supported by NYSE-listed shares — the bulk of China’s energy opportunities are smaller and unknown.

Ever heard of Shenhua Energy or Longyuan Power? Didn’t think so.

To that end, a bet on the Global X China Energy ETF (CHIE[15]) maybe in order. The exchange-traded fund[16] tracks 26 different Chinese energy firms — including CEO, PTR and SNP — as well as many of the smaller and more regional energy plays in the nation. This mix of domestically focused firms as well as the three international big boys gives CHIE and investors a “total look” at China’s energy market and could make it the best overall play China’s rising energy demand.

The fund is historically prone to bouts of feast and famine when it comes to number of shares traded — so limit orders are required when buying the ETF. Expenses are a bit on the high side at 0.65% or $65 per $10,000 invested … but that’s understandable given the size and location of its holdings.

Either way, CHIE could be just what investors are looking for in a Chinese energy play.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.